Indian equity markets continue their five-month downward spiral. The benchmarks have lost about 15% in value, but the broader market has seen a much more severe decline. In the Nifty 500 index, 18% of the companies have lost about 40% to 50% of their value from their highs. About 4% of stocks have lost more than 50% of their value.
The portfolio continues to hemorrhage. Given that the stock market had seemed overvalued, this correction, however painful, is par for the course. It is wise to stay calm if you have followed your asset allocation and have not speculated and bought high-priced stocks.
As of Jan 2025, out of the 68 lac crs of mutual fund assets, 40 lac cr are equity / equity-oriented mutual funds. Nonetheless, one must remember that 50% of retail mutual fund investors entered the markets after 2021. It is time for a reality check as they see their first bear market and Trump shaking up the world economy. As always, asset allocation should be followed, especially in these uncertain times, if equity is a high allocation in your portfolio. We need to look at assets whose returns are not correlated with equities. As equities are a volatile asset class, other assets considered alternatives to equities are…
Real Estate: Needs high investment, less volatile but may be slightly illiquid.
Bank Deposits: A no-brainer investment option. Safe & secure (as long as the bank you choose is solvent & regulated by the Reserve Bank of India). Of the total Indian savings, over 40% are in bank fixed deposits.
Small Savings: Senior citizens’ savings scheme, National savings certificate, Post Office monthly Income scheme, time deposit schemes, public provident fund, Government guaranteed.
Gold: Gold has always been India’s favourite investment option. It has risen significantly along with Indian equities but does not generate income.
Debt Mutual Funds: The Indian mutual fund industry offers a remarkable array of debt products. Unfortunately, investors have lost interest in them after an income tax change on capital gains. The Finance Bill 2023 proposed taxing the profits from Debt Mfs at slab rates against the former charge of 10% (plus surcharge) without indexation or 20% (plus surcharge) with indexation. As a consequence, Debt Mfs has lost ground. In 2020, they were 45% of the total assets under management of mutual funds, and in 2025, they are 25%. Despite the onerous tax change, there is still merit in the product, and I will make my case.
Corporate Bonds: The Indian regulator has long wanted to expand the corporate bond market, especially for retail investors. However, it is still not a very popular option for various reasons.
Indian high-net-worth and retail investors are somewhat familiar with corporate bonds, primarily when investing in a new bond fund offer that lays out the issuer’s financials, credit rating, and terms. Buying a corporate bond in the secondary market is a different story. The investor has to research the credit rating, financials, price/yield, whether a particular bond has accrued interest, and whether the price quoted is fair, as this market is illiquid in smaller lots.
When you invest in a company’s equity, you need only an ISIN or a stock symbol. The State Bank of India’s stock symbol is SBIN. Buying or selling an SBI share is simple. On the other hand, if you want to buy an SBI Bond, you will have multiple options. There are upwards of 20 SBI-listed bonds. Every bond has a unique term, security, maturity date, etc., which can be very confusing for a retail investor to buy or sell.
Also, it is hard for an inexperienced investor to understand the credit risk rating, bond terms, and how prices move in the bond market. The triggers are slightly different, like inflation and interest rates set by the central bank. The prices in the bond market move in a grid; the prices of different bonds are linked to the risk-free rates set for government borrowings. All other bonds are priced off that depending on their risk perception and that bond’s unmet demand.
I believe the best way for a retail investor to invest in corporate bonds or Government Securities is through a mutual fund. A fund manager constructs a diversified bond portfolio according to the scheme profile. The investor can move in and out and receive dividends if needed.
If an investor invests in a bond that defaults (which can happen, as some businesses will inevitably fail), he has to face the full impact of the loss. It is hard for him as an individual to fight for resolution. If a default occurs in a mutual fund scheme, it is always part of the portfolio, so the impact is lower, and the fund house is fully equipped with a legal team to deal with it.
A few years ago, there were instances of excesses by the fund managers and a few defaults in some Debt MF schemes. The most important one was the Franklin Templeton mutual fund stopping redemptions as its scheme faced a run. As with any evolving industry, the trustees and regulators intervened and set appropriate risk management measures. Eventually, most investors faced some losses but did not lose their entire principal.
There are many types of debt funds (overnight, money market, gilt funds, dynamic bond, corporate bonds, short term, medium term, etc.) to suit different investor needs. However, returns in mutual funds are not guaranteed as against a bank fixed deposit. The net asset value of a debt mutual fund fluctuates as bond prices move. The investor is taking some risk and was incentivised to do so with the lower capital gains tax of 10%.
The argument for higher tax was that institutions and corporates unfairly took advantage of the Debt MFs’ lower tax regime. That could be true, but it can be countered with a lower cutoff, like 5 lacs or 10 lacs, or a separate retail scheme with the old tax treatment. That would force the mutual funds sales division to broaden the investor base. I believe that Debt MFs, with their easy liquidity and ease of operations, are a good option if the tax on them is favourable.
Gains from equity and equity MF were tax-free, introduced in 2018 when the equity culture took off. I hope that the powers that be rethink the tax strategy for Debt MFs to develop and broaden the fixed-income market.
One mutual fund category that deserves mention for the asset allocation of smaller investors is a multi-asset fund. This scheme invests in different asset classes, primarily equity, debt, and gold. Our next blog will focus on that.
This is not to say that one should desert equity and equity mutual funds as markets have corrected. This overdue correction strongly re-emphasizes the need for a well-diversified portfolio. Debt MFs should be frontrunners in a well-rounded portfolio.
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